A Little More on Fuqi (FUQI)

As expected, FUQI is still unable to file a 10K. In an NT10K filing last night, available here, they admit that not only can the company not produce the required documents by the normal deadline, they already know they will miss the 15 day extension period:

the Registrant is unable to timely file its Annual Report on Form 10- K for the year ended December 31 , 201 2 .   The Registrant will file its Annual Report on Form 10- K for the year ended December 31 , 201 2 as soon as it is able; however, the Registrant is not able to provide a reasonable estimate as to such filing at this time, which will not occur within the fifteenth calendar day after the prescribed due date for such report.

There is also a fascinating lawsuit in California between a FUQI stuckholder, Michael Patrick Kelly, and a former FUQI director and head of its Audit Committee, Victor Hollander.

Hollander, a US resident, is likely the only person affiliated with FUQI that can be properly served. Victor might want to make sure FUQI has been keeping up its D&O insurance. Here is an excerpt from the latest court filings:

Kelly v. Hollander, No. B240829, 2013 BL 54904 (Cal. App. 2d Dist. Mar. 01, 2013)
Michael Patrick Kelly, Plaintiff and Appellant,
Victor A. Hollander, Defendant and Respondent.

Hollander is an independent director of Fuqi International, Inc. (Fuqi) and chairman of its audit committee. Fuqi is a publicly traded company that designs and sells precious metal jewelry in China. It went public in the United States in 2007 and had a secondary stock offering in 2009, raising approximately $150 million.

Kelly is a shareholder of Fuqi who invested substantial amounts in the company. In 2009 and 2010, he bought over $2 million of Fuqi shares.

After numerous quarters reporting stellar growth, Fuqi issued a press release and filed an 8-K form in March 2010 stating that its prior financial statements were not reliable. Fuqi indicated that the statements would be amended and “restatements” would be issued, and that its 2009 annual report would not be timely filed. Fuqi described the problem with its prior financial statements as minor and estimated that the restatements would reflect a rather immaterial net adjustment of less than 20 cents earnings per share.

Over the next year, neither the restatements nor the 2009 annual report were issued, and Fuqi provided no explanation for the delay. The price of the stock declined precipitously from a high of approximately $32 in September 2009 to approximately $1.50 in November 2011.

Kelly alleges that, beginning in September 2010, he “set on a course of action to uncover the truth as to why such an apparently benign accounting issue could take so long to correct and re-state. The Plaintiff having already lost a substantial amount of money from the fall of the stock price was concerned that the entire company could be another Chinese fraud. The Plaintiff was not interested in trading the stock, in gathering any insider information, but in simply learning the truth.”

Kelly proceeded to make contact with Hollander. In October 2010, Kelly had a telephone conversation with Hollander in which Hollander told him that that there was “no fraud at Fuqi,” that restatements would be filed within 15 days, and that the cumulative adjustment would be similar [*2] to that indicated in the March 2010 press release. According to the complaint, Hollander knew that this statement was false when he made it because he knew that over $100 million in cash raised from Fuqi’s stock offering had been embezzled. Hollander knew that a restatement could not be filed within 15 days and that, if any adjustment were made, it would be much greater than the amount indicated in the prior press release. Kelly alleges that Hollander was deliberately attempting to mislead him and that he relied on Hollander’s false representations and continued to hold stock because of them.

A few days after the telephone call, Kelly and his son had lunch with Hollander in Beverly Hills. Hollander again told him that Fuqi would file restatements within 15 days. Kelly alleges that Hollander knew this representation was false, but that Kelly again relied on the representation and continued to hold the stock.

Kelly further alleges that during the same lunch meeting Hollander told him that Fuqi would do nearly $1 billion in sales for 2010. The complaint states that this information “had never been released to the street and was inside information. Mr. Hollander broke the law by telling the Plaintiff this information. In fact the entire business of Fuqi International Inc. is built on deceit, non-disclosure, embezzlement, etc. Mr. Hollander intended to induce the Plaintiff to not only hold the stock he presently owned but in fact to buy more stock. The Plaintiff did not trade on this information as that would have been illegal, but continued to hold stock because of this statement.”

Following the lunch meeting, and up through December 2010, Kelly had numerous further phone conversations with Hollander, along with visits to his office and home. Hollander never said that his prior representations were untrue. In December, Hollander told Kelly about his experience with a NASDAQ panel relating to Fuqi’s delisting from the stock exchange. Hollander stated: “The meeting went as well as could be expected. Fuqi was a real company with cash.” Kelly’s complaint calls this statement a “damn lie.” On another occasion, Hollander told Kelly that an independent investigation was conducted and that no fraud was discovered at Fuqi. Again, Kelly alleges that Hollander knew this statement to be false when he made it.

Kelly alleges that, overall, he engaged in at least 20 phone conversations and talked with Hollander several times in person. During each conversation, Hollander assured him that accounting deficiencies would be resolved and restatements would be filed soon. Kelly relied on these representations, which Hollander knew to be false.

Kelly purchased a total of 164,400 shares of Fuqi stock and sold 124,400. He alleges he suffered a net loss of $425,000.

For the curious, Victor Hollander is also involved with:

INKNShrink Nanotech, tipping the scales at $0.002 per share.

MMTCMicro Imaging Tech, a mega-cap at $0.0016 a share and 2.36bn shares outstanding.

AAPTAll American Pet, trading at $0.012 a share.

CHNDChina Direct (Boca and China. Two scams in one!), currently 1c bid.

UTDL – The now delisted United Leisure.

Victor A. Hollander come on down! You’re the next member of the Bad Director list.

The content contained in this blog represents only the opinions of the author. The author may hold either long or short positions in securities of various companies discussed in the blog. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. This blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

One comment

  1. I applaud this guy Michael Patrick Kelly, he has the forsight to go after these guys in this Chinese Reverse Merger Fraud. I myself have taken on the American part of the fraud who have helped the Chinese Fraudsters get away with 1 billion or more. Syntax Brillian went bankrupt in July 2008 and I have been monitoring and intervening since. In july 2011 I filed my own lawsuit in federal court. I have much in common with Mr. Kelly and I will be ready to accept his email at [jandccerny at msn.com]. Best Regards, Charles Cerny

    [Email edited to prevent robo-harvesting of your address – Editor]

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